IN THE HIGH COURT OF KERALA AT ERNAKULAM OT.Rev.No. 39 of 2011()
1. M/S.SUPREME FOOD INDUSTRIES
1. THE STATE OF KERALA
For Petitioner :SRI.C.K.THANU PILLAI
For Respondent : No Appearance
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR The Hon'ble MR. Justice B.P.RAY
O R D E R
C.N.RAMACHANDRAN NAIR & BHABANI PRASAD RAY, JJ.C.R. ----------------------------------
O.T.Revn. Nos.39 & 40 of 2011
Dated, this the 20th day of June, 2011 J U D G M E N T
Ramachandran Nair, J.
The connected revision cases are filed by one and the same assessee challenging the orders of the Kerala Value Added Tax Appellate Tribunal confirming the assessment on sale of deep freezers and disallowance of input tax credit claimed under Section 11 of the Kerala Value Added Tax Act (hereinafter referred to as the Act for short).
2. We have heard learned counsel appearing for the petitioner and learned Government Pleader for the respondent.
3. The petitioner is a Company engaged in manufacture and sale of ice cream. Distributors were appointed in the State for distribution of ice cream to dealers and consumers. As an incentive the petitioner made bulk purchase of deep freezers and delivered the same to O.T.Revn.Nos.39 & 40 of 2011
distributors against collection of security deposit almost equal to the value of deep freezers from each of the distributors. In the KVAT assessments for the years 2005-06 and 2008-09, the petitioner claimed that supply of deep freezers to the distributors against collection of security from them does not amount to sale and so much so, the same cannot be treated as sale for the purpose of assessment. The petitioner made an alternate claim for input tax credit, which is the tax paid on the purchase as a credit while determining the petitioner's liability for tax. The first appellate authority as well as the Tribunal rejected both the claims by holding that supply of deep freezers by the petitioner to the distributors is sale of capital goods, which is not entitled to depreciation under Section 11(5)(o) of the Act. It is against these orders, the petitioner has come up with these revisions.
4. Learned counsel for the petitioner relied on copy of the standard agreement executed between the petitioner and one of the distributors and contended that ownership of deep O.T.Revn.Nos.39 & 40 of 2011
freezers delivered to the distributors is retained by the petitioner and as and when distribution agreement is terminated, the petitioner will collect back the deep freezers. However it is provided in the agreement and it is conceded in the Court that the petitioner will collect charges for the wear and tear, which is 25% of the value at flat rate leading to full recovery of the value of deep freezers in the course of 4 years.
5. On going through the agreement and after hearing both sides we do not find any merit in the contention of the petitioner that there is no sale of deep freezers to the distributors because in fact it is a sale on deferred payment basis and the cost is recovered at 25% each for the 4 years from the date of delivery. In our view, the transaction is a pure sale but on credit basis payable in four installments. The lower authorities including the Tribunal rightly found that the agreement does not reflect the nature of transaction which is nothing but outright sale camouflaging the consideration as deposit, which will be adjusted in four equal installments in O.T.Revn.Nos.39 & 40 of 2011
the course of 4 years. We, therefore, reject this contention raised by the petitioner and uphold the order of the Tribunal.
6. So far as the next contention is concerned, i.e. the petitioner's claim for input tax credit, we are of the view that the order of the Tribunal is not sustainable for more than one reason. In the first place, after rejecting the petitioner's claim of continued ownership even after supply of deep freezers to the distributors for their own use and after treating the transaction as an outright sale, the Department cannot thereafter hold that the goods continue as capital goods as defined under Section 2(x) of the Act. Deep freezers purchased and delivered are used for storage of ice cream by the distributors, and so much so, it is capital goods for the distributors; and when the petitioner is engaged in purchase and sale of the same to their distributors the petitioner was engaged only in trading of the said goods. So much so, the goods are not capital goods at the hands of the petitioner, who has purchased and sold the same to the distributors. O.T.Revn.Nos.39 & 40 of 2011
Besides this, what we notice is that capital goods in respect of which input tax credit is not available are such goods notified under Section 2(x) of the Act by virtue of Section 11(5)(o) of the Act. Notification SRO 224/2005 issued under Section 2(x) of the Act covering 9 items does not include deep freezers as an item in the negative list for the purpose of disallowing input tax credit. So much so the finding of the Tribunal that the item is capital goods and is in the negative list are not sustainable. Learned Government Pleader pointed out that since the petitioner's sale is at reduced price than the original cost, by virtue of the 2nd proviso to Section 11(3) of the Act the petitioner is not entitled to input tax credit in excess of the output tax payable for the sale of the goods. It is a matter to be seen whether the sale is at discounted price and if so the above provision disentitles the petitioner for input tax credit in excess of the output tax payable on the sale of deep freezers made to the distributors.
Therefore these revision cases are allowed in part by O.T.Revn.Nos.39 & 40 of 2011
directing the Assessing Officer to verify the payments received, outright and or deferred by way of deposit or otherwise in respect of the supply of deep freezers by the petitioner, and grant input tax credit subject to the 2nd proviso to Section 11(3) of the Act.
(C.N.RAMACHANDRAN NAIR, JUDGE)
(BHABANI PRASAD RAY, JUDGE)